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Thursday, April 05, 2012

The JOBS Act: "A Victory of Faith over Basic Logic"

James Kwak on the JOBS act:

Something for Nothing?, By James Kwak: The so-called JOBS act is a victory of faith over basic logic. The motivating idea seems to be that if we reduce the regulations that govern the process of raising capital, small companies will find it easier to raise money, and that money will translate into jobs. Many people have pointed out some of the problems with the bill:... for example, Andrew Ross Sorkin highlighted the potential for companies to take advantage of investors, and Steven Davidoff pointed out that regulation is probably not the reason for the decline in the number of small company IPOs.
There are a couple of ... fundamental misunderstandings... First, it’s not clear that relaxing regulations will actually make it cheaper for companies to raise money. Sure, eliminating the independent audit requirement will save companies a few bucks. But what really affects the cost of capital is not out-of-pocket fees but the price that investors are willing to pay for equity. ... If small companies are allowed to provide less information to investors, that could simply make it more expensive for them to raise money.
Second, and more important, it is definitely not true that more capital for everyone is always a good thing. ... The housing bubble, if nothing else, should have convinced us of that point. There are plenty of startups that are are risky and should face a high cost of capital... (Think back to the Internet bubble...) Making it easier for such companies to raise money is a bad thing, not a good thing. ...
Two more points...: Relaxed reporting requirements can actually be bad for good companies. Good companies benefit from tougher disclosures because it makes it possible for them to differentiate themselves from bad companies. ...
In addition... If you’re going to have different standards for large and small companies, the requirements for small companies should be higher. One theory of securities markets is that regulation is unnecessary because market participants will police issuers... I have doubts about this..., but it is certainly more true for large companies, which get tons of attention from institutional investors, than for small ones. ...
[L]ess regulation does not automatically mean provide more capital for investment—nor is more capital for small companies always a good thing.

Perhaps a better title would have been "A Victory of Lobbying over..." [See, however, Justin Fox who says "The ... JOBS Act ... has ... united the nation's financial journalists in tut-tutting disapproval,... [but] in this case the members of Congress appear to have slightly better arguments on their side than the journalists."]

    Posted by on Thursday, April 5, 2012 at 03:25 PM Permalink  Comments (12)


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